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The Financial Services Act 2012 - the new regulatory framework and its effect on competition within the financial sector

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​On 1 April 2013, the Financial Services Act 2012 (Act) came into full effect; the UK Financial Services Authority (FSA) (also known as the UK Listing Authority or UKLA when acting in its capacity as the UK’s competent authority) was replaced with a new regulatory structure.

The new structure comprises the Financial Conduct Authority (FCA), the Financial Policy Committee (FPC) and the Prudential Regulation Authority (PRA), as summarised in the diagram below. Whilst most firms will be regulated by either the FCA or the PRA, banks, insurers and very large firms will be under the scrutiny of both regulators – the so-called “twin peaks”[1] .

 

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The FCA has been granted a number of new powers by the Act, including powers to:

  • make temporary product intervention rules (TPIRs), allowing it to block an imminent product launch or to stop an existing product;
  • require firms to withdraw or amend misleading financial promotions with immediate effect;
  • publish details of the start of enforcement proceedings against a firm for rule breaches or compliance failings (this power has also been granted to the PRA); and
  • impose requirements on certain unregulated parent undertakings that exert influence over authorised persons (this power has also been granted to the PRA and the Bank of England).

As well as establishing the new regulatory structure and granting the powers described above, the Act has also made various other amendments to the Financial Services and Markets Act 2000 (FSMA) (the piece of legislation under which the FSA was originally introduced). In light of last year’s LIBOR scandal, perhaps one of the most notable amendments is the replacement of section 397 (misleading statements) with a new provision which includes an offence of giving misleading statements and impressions relating to benchmarks (i.e. giving incorrect submissions for the purpose of manipulating LIBOR and other similar rates).

Another interesting change to the legislation is that, before the FSA became defunct, any fines imposed by it would be used to reduce the better-behaving firms’ contributions to the FSA’s operations. However, any fines will now be paid directly to the Treasury. It seems likely that the larger than usual fines recently imposed on Prudential[2]  and Lamprell[3]  are a sign of things to come.

The Government is also putting effective competition at the heart of its new UK regulatory regime for financial markets. In addition to taking on the bulk of the FSA’s role, the FCA has been entrusted with responsibility for actively promoting competition in financial markets.


The new ‘competition objective’

The FCA has a new operational objective to promote effective competition in the interests of consumers in the markets for financial services and services provided by recognised investment exchanges[4] .  This will be on a par with the FCA’s market integrity and consumer protection objectives and will enable the FCA to use its full suite of regulatory powers to promote competitive markets proactively and as a priority[5] .  In addition, the FCA is required to discharge its general functions in a way that promotes effective competition in the interests of consumers, as long as that is compatible with its other operational objectives.

For the time being, the FCA is not granted concurrent power to apply general UK competition law directly in the sectors it regulates; this remains with the OFT. That said, FSMA grants the FCA a range of powers and obligations to reinforce its enhanced role in promoting competition, including:

  1. rulemaking powers, such as for setting standards for authorised firms (part 9A FSMA);
  2. a statutory power (along with the PRA) to ask the OFT to consider whether a feature or combination of features of a financial services market in the UK may prevent restrict or distort competition (section 234H FSMA) – the OFT has 90 days to consider what action to take if any;
  3. an obligation to consider advice from the OFT identifying where competition is (or may be expected to be) harmed by either (i) one or more regulating provisions or practices (alone or in combination) or (ii) a feature or combination of features of a UK market that could be dealt with by regulating provisions or practices; and
  4. obligations to receive and respond to ‘super complaints’ from designated consumer bodies[6]  (s140G FSMA).

The FCA is also able to take other measures, such as TPIRs, to address competition issues in the financial services sector.  Although FCA expects most TPIRs to be driven by consumer protection, it has not ruled out using them where competition grounds warrant prompt action[7] .

The OFT and FCA have clarified how co-operation between them will work in light of the FCA’s stronger role in promoting competition, and their shared objective of making financial markets work well for consumers.  On 2 April 2013, they published an updated Memorandum of Understanding (“MOU”)[8]  to ensure that there is a clear and co-ordinated process for the FCA and the OFT to discharge their competition functions effectively, using their different – but complementary - powers. 

The idea of such a framework for co-operation in this area is not new: the FSA and OFT have long worked closely together across a broad range of mutual interests, publishing a Joint Action Plan in 2006, which was supplemented by the original MOU of December 2009.  This has been now been replaced by a much more detailed set of (non-binding) principles to facilitate effective joint working, including:

  1. a designated relationship manager within each organisation;
  2. some guidance on when it might be appropriate for the FCA to take the lead in dealing with issues (and vice-versa);
  3. clearer processes for information sharing, technical assistance, early consultation, and regular meetings. 

Comment

There is unlikely to be a significant change for consumers and industry participants (other than “twin peaks” firms) in the near future; the FCA and PRA will be carving up (and sometimes sharing) the existing FSA handbook between them and, since April 2012, the FSA had already been split between the Conduct Business Unit (becoming the FCA) and the Prudential Business Unit (becoming the PRA). It is therefore understandable that many commentators are of the view that the FCA/FPC/PRA trinity is merely a rebranding exercise rather than a true regulatory change.

However, the FCA has been granted a number of new powers.  Further changes may be felt in the coming months as each agency begins to amend their respective handbooks, particularly in light of any recommendations made by the FPC.  One, already well documented[9], change that will affect firms is the likely increase in their registration fees.

It is also clear that the FCA seems to be taking its new competition law remit seriously.  The FCA will work closely with the OFT and other competition authorities.  However, it is also building its own dedicated competition department, demonstrating commitment within the FCA to tackling any competition issues in financial services in the interests of consumers. Some feel that this can only be a good thing for competition in the sector; however, others have expressed concern that the FCA could in theory exercise rather draconian powers (e.g. TPIRs) in the name of competition, without being subject to the same scrutiny as specialist competition regulators (i.e. OFT and sectoral regulators), decisions of which can be reviewed by the Competition Appeals Tribunal.

For further information, please contact Rachel Iley or James Wilkinson.

[1] See http://www.ft.com/cms/s/0/b8f47360-a103-11e2-990c-00144feabdc0.html#axzz2PrFkc931 for further description of the “twin peaks” and a commentary on the anticipated higher operating costs.

[4] This marks a step up from the FSA’s duty to “have regard to …the need to minimise the adverse effects on competition” and “the desirability of facilitating competition” between those it has oversight of.

[5] As explained at the time the proposals were being debated, this makes clear that competition is “not just an end in itself but also a means to achieving other goals….this duty will prompt the FCA to first think about whether it can use competition, rather than regulation, to achieve an outcome. [W]e need strong regulatory intervention to promote competition. This is an urgent task […] and a key priority for the FCA in its first few years”.  Speech by Financial Secretary to the Treasury, Rt Hon Greg Clark MP; Journey to the FCA, 16 October 2012 http://www.hm-treasury.gov.uk/speech_fst_161012.htm

[6] However, it is important to remember that other parties can still bring complaints to the FCA or the FOS. Super-complaints simply provide a fast-tracked route into the system to ensure that complaints about market failure which harms consumers are given consideration within a fixed time, and that the regulator is accountable for providing a response.  The first round of designations will be made later this year. See http://www.hm-treasury.gov.uk/super_complaints.htm